The Regional Convention on pan-Euro-Mediterranean preferential rules of

The Regional Convention on pan-Euro-Mediterranean preferential rules of origin A remedy for the 'spaghetti bowl effect' WCO KNOWLEDGE ACADEMY FOR CUSTOMS AND TRADE 2014 Rules of Origin July 2014 Guillaume DOREY DG TAXUD – Unit B 3 Rules of origin

Content 1) Introduction 2) The PEM regional Convention - a) General presentation b) Concept and benefits c) State of play of ratification process d) New accession e) On-going work 3) Revision of Rules of origin a) The PEM Convention and the GSP reform (2003 -2011) b) Presentation of the GSP reform

I. Introduction 3

Preferential Originating Status A link between a product and a country depending on: - the location of the production - the conditions of the production in order to: - decide about granting or not tariff preferences

II. The PEM regional Convention An international agreement: - Regional Convention on pan-Euro. Mediterranean preferential rules of origin With 2 appendixes: - General rules for the definition of the concept of originating products - Special provisions http: //new. eur-lex. europa. eu/legal-content/EN/TXT/PDF/? uri=OJ: L: 2013: 054: FULL

II. a. – General presentation Appendix I of the regional Convention http: //eur-lex. europa. eu/Lex. Uri. Serv. do? uri=OJ: L: 2013: 054: 0004: 0158: EN: PDF 6

II. a. – General presentation Appendix I of the regional Convention Main principles criteria Wholly obtained products Positive list Minimal operations Positive list Tolerance rule % in value or weight Sufficiently worked or processed products List rules (Annex II) Principle of territoriality with tolerance Direct transport rule Strict Drawback of customs duties Allowed or prohibited 7

A general balance List rules Rules of Origin Tolerance Cumulation

II. a. – General presentation Appendix I of the regional Convention • A Regional Convention conceived for cumulation. • Network of bilateral free trade agreements between the EU, EFTA States, Faroe Islands, Turkey and Mediterranean countries participating in the Barcelona process (42 parties in total) • A system of pan-Euro-Mediterranean cumulation operates on the basis of identical rules of origin (PEM protocol on rules of origin) annexed to each bilateral free trade agreement • Cumulation concept: "what is yours is mine and what is mine is yours" • Tool of regional integration/enhanced sourcing possibilities 9

40% max non-originating PEM cumulation 1. 000 € Turkey EU 4. 000 € Morocco Tunisia 1. 000 € 10. 000 € Russia 2. 000 €

Manufacture from yarn Swimsuit HS 61 12 EUR-MED or Invoice declaration EUR-MED PO Switzerland « no cumulation applied » 2 Jordan Knitted fabrics HS 60 05 Switzerland 3 1 EUR-MED or Invoice declaration EUR-MED PO Jordan « Cumulation applied with Switzerland » Egypt Export without working 4 Tunisia SW Man-made staple fibres SH 5503 Korea

Turkey EU Norway Bosnia and Herzegovina Switzerland/ Lichtenstein Montenegro Iceland Faroe Albania Morocco Former Yugoslav Rep. of Macedonia Algeria Serbia Tunisia Egypt Lebanon Jordan Palestine Israel Syria

PEM cumulation - 16 parties: EU, TR, Faroe Islands, EFTA States, Mediterranean Countries SAP cumulation (Stabilisation and Association Process) – 7 partners: EU, TR, 5 Western Balkan partners • More than 60 Free Trade Agreements (FTA) between these partners • Each containing a Protocol setting identical rules of origin • Modifying rules of origin requires changing all the Protocols • PEM and SAP do not overlap

Bosnia and Herzegovina Turkey EU Norway Switzerland/ Lichtenstein Montenegro Iceland Kosovo* How does PEM cumulation work? • There are FTAs linking all /some of the Members Rep. of Moldova Faroe • Each bilateral FTA contains a Protocol on origin Morocco • All the Protocols on origin contain identical Ro. O Albania Former Yugoslav Rep. of Macedonia • Every time a modification in the Ro. O is needed, all the Protocols need to be adapted. Algeria Tunisia Serbia Egypt Lebanon Jordan Palestine Israel Syria * This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo declaration of independence.

Bosnia and Herzegovina EU Turkey Norway Switzerland/ Lichtenstein Montenegro Iceland Kosovo* Rep. of Moldova Albania Former Yugoslav Rep. of Faroe The PEM Convention: A single text on Ro. O, which replaces each Protocol in each FTA Morocco Algeria Macedonia Tunisia Serbia Egypt Lebanon Jordan Palestine Israel Syria

New Matrix of PEM cumulation (OJ C 111, 12. 4. 2014, p. 7)

II. b. – The PEM Convention: Concept and benefits • Will base diagonal cumulation of origin on a single legal instrument. No more separate protocols on Ro. O. • Will allow easier revision and update of Ro. O. • Will include entire Western Balkan region into in the pan. Euro-Mediterranean zone of diagonal cumulation. • Will allow accession of neighbouring countries in the pan. Euro-Mediterranean cumulation zone. • Will create extended opportunities for cumulation

Other EU neighbouring countries Pan Euro Med Convention Lybia Reciprocal Preferences Ukraine Balkans EU Autonomous Preferences Meds –EFTA –Turkey ATMs ATPs XK MD GSP countries (Georgia)

II. c. - State of play of ratification process • Contracting Parties for which the Convention has entered into force. • NB: Convention still needs to be referred to in their origin protocols so as to become applicable)

Partner Signature Notificatio n Entry into force Norway 15. 06. 2011 09. 11. 2011 01. 2012 Switzerland 15. 06. 2011 28. 11. 2011 01. 2012 Lichtenstein 15. 06. 2011 28. 11. 2011 01. 2012 Iceland 30. 06. 2011 12. 03. 2012 01. 05. 2012 Albania 27. 06. 2011 05. 03. 2012 01. 05. 2012 EU 15. 06. 2011 26. 03. 2012 01. 05. 2012 Former Yugoslav Republic of Macedonia 15. 06. 2011 14. 06. 2012 01. 08. 2012 Montenegro 15. 06. 2011 02. 07. 2012 01. 09. 2012 Serbia 12. 11. 2012 01. 07. 2013 01. 09. 2013 Jordan 07. 2011 16. 08. 2013 01. 10. 2013 Faroe Islands 15. 06. 2011 09. 2013 01. 11. 2013 Turkey 04. 11. 2011 04. 12. 2013 01. 02. 2014 20

Partner Signature Notification Entry into force Egypt 09. 10. 2013 23/04/2014 Palestine 18. 09. 2013 (June to be confirmed) Tunisia 16. 01. 2013 (June to be confirmed) Israel 10. 2013 (June to be confirmed) Morocco 18. 04. 2012 Algeria 05. 10. 2012 Bosnia and Herzegovina 01. 06. 2014 24. 09. 2013 Kosovo* Lebanon Syria * This designation is without prejudice to positions on status and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence. 21

II. d. - Accession of the countries of the Eastern Partnership • The EU Neibourhood Policy: • the Eastern Partnership, • the Union for the Mediterranean • Communication on "A New Response to Changing Neighbourhood" May 2011: "The Commission will examine how the Convention can be extended to other ENP partners and will make appropriate proposals. " • Accession to PEM Convention offered in DCFTA: Ø Ukraine, Ø Georgia, Ø Moldova

II. e. - The PEM Convention – on-going work Communication on "A New Response to a Changing Neighbourhood" May 2011. http: //ec. europa. eu/world/enp/pdf/com_11_303_en. pdf "The rapid implementation of the new Convention on Pan-Euro. Mediterranean preferential rules of origin will be one important element for the partners in the South. "

II. e. - The PEM Convention – on-going work • Two exercises conducted in parallel: • phasing-in of Convention and • discussions on revision (both on articles and 'list rules') • Objective: • have both exercises completed and 'joined' in mid-2015

III. The revision of ‘PEM’ rules of origin • The revision work is being carried out in the Pan-Euro-Med Working Group (PEM WG) • Contracting Parties (as much as possible grouped geographically) were invited to express their positions regarding list rules: • • EU + Turkey EFTA States MED countries Western Balkans • Aim of the revision: • • • simpler rules, more liberal rules, and rules responding to traders' needs.

The revision of ‘PEM’ rules of origin SIMPLER more RELAXED responding to ECONOMIC REALITIES

III. The revision of ‘PEM’ rules of origin • Article by article examination (already well advanced but all partners rightly consider that provisions such as cumulation cannot be assessed without full knowledge of future list rules) • On list rules: Seeking convergences

III. a. Presentation of the GSP reform Commission Regulation (EU) n° 1063/2010 of 18 November 2010 A - The background B - Overview of the main changes between the old GSP rules and the new GSP rules C – Modernisation of the rules of origin 28

A. GSP Reform - Background 1) Commission’s Green Paper (2003) and Communication (2005) on the simplification of the rules of origin 2) Impact assessment 3)Commission’s draft regulation (October 2007) Commission’s revised proposal (November 2008) Agreement of the Member States (September 2010) 29

A. GSP Reform - Background 1) Commission’s Green Paper (2003) and Communication (2005) on the simplification of the rules of origin • The old origin rules did not fit current economic reality. • The current origin rules were seen as too complex, restrictive and they lacked • • transparency. There was a clear call for rationalisation and simplification of the origin rules. The system needed to be changed in order to provide an adequate level of assurance that the products for which preferential treatment was claimed did actually satisfy the origin rules. The system of paper-based certificates needed to be replaced by an electronic document. There was a need for increased European Union monitoring and greater coordination and cooperation to ensure compliance with the rules of origin. 30

A. GSP Reform - Background 2) Impact assessment • Simplification and appropriate relaxation of the rules for • • determining origin Supported by adequate management and control procedures, all parties need to know exactly what is required of them and it is necessary for there to be confidence in administrations. Conversely, efficient management and control is facilitated by rules which are easy to understand apply. 31

A. GSP Reform - Background 3) Commission’s draft regulation in October 2007 Commission’s revised proposal (November 2008) Agreement of the Member States (September 2010) Commission Regulation (EU) N° 1063/2010 of 18. 11. 2010 32

A. GSP Reform - Background Legal framework of the GSP rules of origin • Commission Regulation (EU) No 1063/2010 of 18. 11. 2010 amending Regulation (EEC) No 2454/93 (implementing measures of the customs code) • Official Journal No L 307 of 23. 11. 2010, p. 1 • Entered into force on 01. 2011 33

B. GSP Reform - Main changes • The rules of origin are defined as far as possible on a sector-by-sector rather than a product-by-product basis. • The rules applicable to products also take into account the specific situation of least developed countries (in general allowing a maximum content of non-originating materials of up to 70% or providing for an equivalent level of relaxation for products originating in the least developed countries) 34

B. GSP Reform - Main changes 1)Simpler origin determination criteria 2)Applicability of cumulation of origin 3)Other features in general provisions 35

B. GSP Reform - Main changes First main change Simpler origin determination criteria • • A maximum permitted content of non-originating materials; Change of tariff heading or sub-heading; A specific working and processing operation; The use of wholly obtained materials. 36

B. GSP Reform - Main changes Second main change Applicability of cumulation of origin • Bilateral cumulation EU-beneficiary country; • Simplified regional cumulation with 4 regional groups; • Extended cumulation between a beneficiary country and a country with which the European Union has a free-trade agreement in force; • Cumulation of origin with industrial goods originating in Norway and Switzerland, extended to Turkey. 37

B. GSP Reform - Main changes Third main change Other features in general provisions • Replacement of the direct transport rule with a more flexible non manipulation principle (Article 74); • Removal of the crew requirement in the definition of "its vessels" for fishery products captured outside territorial waters to be considered as wholly obtained (Article 75(2)); • Relaxation (from 10 to 15%) and the adaptation to sectoral specificities of the general tolerance rule, from now on expressed as a percentage of weight for agricultural products (Article 79). 38

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Simpler origin determination criteria a maximum permitted content of non-originating materials Introduction of an added value rule for chapter 44 with a threshold of 70 % of non originating materials 39

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Simpler origin determination criteria change of tariff heading or sub-heading Suppression of additionnal mandatory rules 40

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Simpler origin determination criteria Until 2011 41

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Simpler origin determination criteria A specific working and processing operation 42

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Simpler origin determination criteria The use of wholly obtained materials The definition of the product wholly obtained is more precise. New wording « grown » New definition New wording « scrap » 43

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Applicability of cumulation of origin • Cumulation of origin with industrial goods originating in Norway and Switzerland, extended to Turkey • A new type of cumulation: extended cumulation with industrial goods • A new group for regional cumulation : MERCOSUR (Argentina, Uruguay, Paraguay, Brasil) • A new possibility of « cross » cumulation between the groups I and III 44

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions • Replacement of the direct transport rule with a more flexible non manipulation principle (Article 74); • Removal of the crew requirement in the definition of "its vessels" for fishery products captured outside territorial waters to be considered as wholly obtained (Article 75 -2); • Relaxation (from 10 to 15%) and the adaptation to sectoral specificities of the general tolerance rule, from now on expressed as a percentage of weight for agricultural products (Article 79); • Derogation. 45

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions Non manipulation principle (Article 74 – CCIP) Direct transport rule replaced by a “non-manipulation” clause • Conditions for transportation have been relaxed and simplified in order to correspond with the practice of the supply chain 46

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions Non manipulation principle (Article 74 – CCIP) The products declared for release for free circulation in the European Union shall be the same products as exported from the beneficiary country in which they are considered to originate. They shall not have been altered, transformed in any way or subjected to operations other than operations to preserve them in good condition, prior to being declared for release for free circulation. Compliance with this provision shall be considered as satisfied unless the customs authorities have reason to believe the contrary; in such cases, the customs authorities may request the declarant to provide evidence of compliance, which may be given by any means. 47

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions • Non manipulation principle (Article 74 – CCIP) On the contrary, the direct transport rule requires that the goods are either: • transported to the EU without passing through the territory of any other country; • or transported via another country, in circumstances where they remain under the control of the customs in that country and do not undergo operations other than unloading, reloading or any operation designed to keep them in good condition 48

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions Non manipulation principle (Article 74 – CCIP) With the traditional direct transport rule, the evidence may be either: – a transport document indicating a singled contract for the carriage of the goods; – a certificate issued by the customs authorities of the country of transit: • giving an exact description of the goods; • stating the dates of unloading and reloading or arrival and departure; and that the goods • remained under customs control and underwent no operations other than those necessary to keep them in good condition; 49 – any documents that confirm that the conditions set out above have been met.

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions Removal of the crew requirement in the definition of "its vessels" for fishery products captured outside territorial waters to be considered as wholly obtained (Article 75 -2 - CCIP) Reflect the reality of the economic sector. Vessels conditions which allow fishery products to be considered as originating or not, are simplified. 50

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions Relaxation (from 10% to 15%) and the adaptation to sectorial specificities of the general tolerance rule, from now on expressed as a percentage of weight for agricultural products (Article 79 – CCIP) Tolerance rule is relaxed from 10% to 15%. Tolerance is expressed either in weight or in ex-works price 51

C. GSP Reform – Modernisation of Ro. O 1) Appropriate rules for determining the acquisition of origin Improvements in general provisions/list rules Tolerance rule expressed as a percentage of weight for agricultural products Example of product containing sugar 52

Tolerance in value and in weight in rules of origin. How does it work? Tolerance in value Standard EU rule of origin for Chapter 18 (PEM and former GSP) Manufacture: From materials of any heading, except that of the product, and -in which the value of all the materials of Chapter 17 used does not exceed 30% of the ex-works price of the product Price 5 $ Price 3 $ Price 5 $ Product 1 Cocoa paste 1803 10 00 Product 2 White sugar 1701 99 10 Weight 30 kg Weight 75 kg Final product Weight 100 kg Price 10 $ Chocolates not containing alcohol 1806 90 19 3$ paid for white sugar = 30% of 10$ → all sugar can be non-originating After prices have changed, 5$ paid for white sugar = 50% of 10$ → 20% of sugar used need to be originating If price for materials of Ch 17 in the world market increases, it becomes more difficult to meet the rule of origin. 53

Tolerance in value and in weight in rules of origin. How does it work? Tolerance in weight Rule of origin for Chapter 18 in the new GSP: Manufacture: [. . . ] in which the individual weight of sugar does not exceed 40% of the weight of the final product [. . . ] Price 5 $ Price 3 $ Price 5 $ Product 1 Cocoa paste 1803 10 00 Product 2 White sugar 1701 99 10 Weight 75 kg Weight 30 kg Final product Weight 100 kg Price 10 $ Chocolates not containing alcohol 1806 90 19 30 kg at price of 3$ → all sugar can be nonoriginating (30 kg < 40% of 100 kg weight → the rule is met) 30 kg at price of 5$ → all sugar can be nonoriginating (30 kg < 40% of 100 kg weight → the rule is met) Compliance with rules of origin is unaffected by price fluctuations of raw materials; weight is more objective and easier to monitor 54

III. b. EU proposal for the PEM Convention in line with the GSP reform • New approach in line with the reform of EU GSP Ro. O • General provisions: • Definitions • Crew requirement • Tolerance rule • Non-alteration rule • List rules: • Sector-by-sector approach • Simpler approach (alternative rule, chapter rule…)

III. b. EU proposal for the PEM Convention in line with the GSP reform Example of textile The current standard PEM rule • defines the origin of the final product by taking into account the manufacturing process in relation to the non-originating materials used at the start of the processing. New approach with the reform of EU GSP Ro. O • Identification of key manufacturing processes carried out in relation to the final product • The origin of the materials used in these manufacturing processes should not be taken into account.

Current PEM rule for yarn: GSP rule for yarn: EU proposal for PEM rule for yarns: Manufacture from: raw silk or silk waste, carded or combed or otherwise prepared for spinning, other natural fibres, not carded or combed or otherwise prepared for spinning, chemical materials or textile pulp, or paper-making materials Spinning of natural fibres or extrusion of man-made fibres accompanied by spinning or twisting Spinning of natural fibres or Extrusion of man-made fibres combined with spinning or Twisting combined with gimping

III. b. EU proposal for the PEM Convention in line with the GSP reform The printing rule • recognised as origin conferring when combined with specific additional processes and fulfils a value added criterion. Two steps: 1: the creation of a simple printing rule (definition) 2: the creation of a standalone printing rule 58

POSITION OF PEM PARTNERS Position 1 Current PEM Position 2 Position 3 Double transformation Status quo with options ex Chapter 62 Articles of Manufacture PEM Rule to Weaving combined apparel and from yarn be kept with making-up clothing or accessories, not Making-up preceded by knitted or Printing (as standalone crocheted; operation) except for: or Single transformation (with options or not) Manufacture from fabric (+ dyeing) Or Manufacture from materials of any heading, except that of the product Or Manufacture in which Making-up preceded by the value of all the Printing (as standalone materials used does operation) or by not exceed 70% of the dyeing (as standalone ex-works price of the operation) product 59

III. b. EU proposal for the PEM Convention in line with the GSP reform A balanced approach - double transformation - strike the balance between the needs of more traditional and more innovative textile industries. - allows more flexibility; allows more qualifying processes and processes at a higher transformation level; provides simplification; increases legal certainty. 60

Conclusion The revision of ‘PEM’ rules of origin • The way forward: • Compromise will have to be sought… at PEM working group level… and EU level ('common position' to be adopted by qualified majority) • Given the divergent views which have been presented during consultations, no Party can escape making concessions.

A general balance List rules Rules of Origin Tolerance Cumulation

• Unit B 3 – Origin of goods • European Commission DG Taxation and Customs Union • TAXUD-UNIT-B 3@ec. europa. eu • http: //ec. europa. eu/taxation_customs/customs_duties/rules_origin/preferential/index_en. htm